July Commentary

GLOBAL MARKETS

Equity prices were firmer across the board. Bonds were mixed, other than High Yield, and to a lesser extent Investment Grade Credit, compared on a GBP Hedged basis, boosted by stronger US macro data.

US MARKETS

Markets robust overall, with US small caps leading the way

US small cap led the way, but finished off its best levels, with the Russell 2000 posting an impressive 8.0% return over the month. The S&P500 and the Dow (+4.6%) posted slightly more modest increases. Conflicting US macro signals continued but with a somewhat surprising, firmer tone, as weekly jobless claims continued to trend (erratically) higher, while Q1 GDP was revised notably stronger. Inflation continued to moderate, but not at a pace likely to appease the Fed hawks, who are indicating two more interest rate increases are likely this year.

Up 6.5% (US 500)

UK MARKETS

Inflation continues to impact sterling and UK markets overall

Disappointingly strong core inflation data precipitated a 0.5% Base Rate increase from the Bank of England (BoE), to 5%. The greater than expected June hike pressured short-duration sterling bonds. After a torrid start to the year, longer-dated bonds found some solace in the more hawkish BoE stance. The stronger pound was supported by the bond market pricing in a Base Rate of 6% by year end. Impacted by the strong pound, UK equities, particularly the more economically sensitive mid-caps stocks, lagged most other developed markets.

Up 0.7% (UK All Share)

EUROPEAN MARKETS

Performed reasonably well despite poor macro data

European equities produced positive returns, but, on the back of a further 0.25% increase in the ECB’s repo rate (to 4.0%, its highest since 2001), they again lagged the US. Recent European macro data, such as the Eurozone Manufacturing PMI, has disappointed, printing at 44.8 in June (for May). Markets welcomed the recent Greek election results. After recent elevated volatility, most European Bond yields moved sideways during the month. The exception was Germany, where 10yr yields moved up from 3.19% to 3.64%.

Up 2.6% (Euro 600 Index)

JAPAN MARKETS

Continued its strong recent performance

The Japanese stock market continued its good run, aided by the weak Yen and low interest rates (by current global standards), which are a boon to its manufacturing base. The Nikkei is now trading near 33-year highs. 1Q23 GDP was up +2.7% on an annualised basis. Abenomics’ three arrows are finally falling into place, if in large part thanks to Covid and rampant inflation elsewhere.

Up 7.4% (Japan Index)

Key Points

•  Sterling performed strongly following the higher-than-expected 0.5% base rate increase from the Bank of England. Over the month it rose 2.6% versus the US Dollar, closing at U$1.271.

•  The Yen was the weakest major currency, as Japanese interest rates look set to remain significantly below their Western peers. Inflation has picked up, but, at 3.2%, is not at a level high enough to motivate the Bank of Japan to tighten policy.

•  Despite a hawkish Fed, indicating two more rate increases should be expected this year, the dollar was one of the weaker majors.

•  The Chinese Yuan continues to soften, from lows in 2023 near CNY8.2/£ to just below CNY9.25/£ currently, aided by China growth disappointing and rates easing.

Key Points

•  High Yield had a good month, boosted by a better economic outlook. Defaults have been rising, but the market took comfort in improved US economic data and US CPI declining to 4%, pointing to a potential economic soft landing.

•  Inflation Linked Gilts performed well despite sticky UK inflation and a more aggressive central bank. Year-on-Year inflation is expected to soften imminently, as higher energy costs in 2022 begin to drop out of the data in the coming months.

•  Short-dated gilts bore the brunt of the more aggressive tightening approach from the BoE. 2-year gilts currently yield 5.3%, while for 6 months an investor can now achieve 5.7%.

•  Short to medium dated US Treasuries continue to feel much of the pain, with 2-year yields rising around 40 basis points for the month, while 3-month and 30-year treasuries were little changed.

•  Japanese bonds are little changed on the year, which, from a performance perspective, is great news. However, from a yield perspective, 20-year JGB’s offer less than 1% (unhedged).